Industry Structure Analysis

CANNED FOOD INDUSTRY

Team Members:

202 Akriti Agrawal | 215 Divya Bangera

220 Heemanish Midde | 235 Mohit Soni | 257 Vikrant Warudkar

April 2008 Xavier Institute of Management and Research, Mumbai

Mumbai University

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TABLE OF CONTENTS

1. INTRODUCTION

1.1. Market Analysis 2

1.2. Market Value 2

1.3. Market Volume 3

1.4. Market Segmentation I 3

1.5. Market Segmentation II 3

1.6. Market Share 3

2. COMPETITIVE LANDSCAPE

1.1. Buyer/Supplier power 4

1.2. Economies of scale 4

1.3. Brand loyalty 4

1.4. Access to Raw materials 4

1.5. Availability of substitutes 5

1.6. Entry criteria 5

1.7. Capital expenditure 5

1.8. Exit criteria 6

1.9. Distribution 6

3. LEADING COMPANIES

1.7. Del Monte Foods Company 7

1.8. ConAgra Foods, Inc. 7

1.9. Hormel Foods 8

4. STRUCTURE ANALYSIS

1.1. Entry Barriers 11

1.2. Exit Barriers 11

1.3. Rivalry among Competitors 12

1.4. Bargaining Power of Buyers 12

1.5. Bargaining Power of Suppliers 13

1.6. Threat of Substitutes 13

1.7. Summary Table 14

1.8. Conclusion 14

5. ANNEXURES 15

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1

INTRODUCTION

The canned food industry will be analyzed taking food processing and canning companies as players and food

retailers as the main buyers. Globally, food retail was fragmented, which means that players can sell to a large

number of relatively small buyers. Key inputs for canned food producers are raw materials such as grains, fruit

and vegetables, and meat and fish. Leading companies in this industry are Del Monte Foods Company,

ConAgra Foods, Inc., and Hormel Foods.

1.1 Market Analysis

The global canned food market generated total revenues of $51.4 billion in 2006, this representing a

compound annual growth rate (CAGR) of 2.2% for the period spanning 2002-2006. In comparison, the

European and Asia-Pacific markets grew with CAGRs of 1.7% and 3.2% over the same period, to reach

respective values of $24.3 billion and $7.3 billion in 2006.

Market volumes increased with a CAGR of 1.7% from 2002 to 2006, to reach a total of 18.2 billion kg in 2006.

The market's volume is expected to rise to 19.8 billion kg by the end of 2011, this representing a CAGR of 1.7%

for the 2006-2011 period. Sales of canned fish/seafood and meat products proved the most lucrative for the

US canned food market in 2006, generating total revenues of $21.8 billion, equivalent to 42.5% of the market's

overall value. In comparison, sales of canned vegetables generated revenues of $13.7 billion in 2006, equating

to 26.6% of the market's aggregate revenues.

The performance of the market is forecast to follow a similar pattern, with an anticipated CAGR of 2.2% for the

five-year period 2006-2011 expected to drive the market to a value of $57.2 billion by the end of 2011.

Comparatively, the European and Asia-Pacific markets will grow with CAGRs of 1.7% and 2.9% respectively

over the same period, to reach respective values of $26.4 billion and $8.4 billion in 2011.

1.2 Market Value

The global canned food market grew by 2.2% in 2006 to reach a value of $50.9 billion.

The compound annual growth rate of the market in the period 2002-2006 was 2.2%. [See annexure 1]

1.3 Market Volume

The global canned food market grew by 1.7% in 2006 to reach a volume of 18.1 billion kg.

The compound annual growth rate of the market volume in the period 2002-2006 was 1.7%. [See annexure 2]

1.4 Market Segmentation I

Sales of canned fish/seafood and meat products account for 42.2% of the global canned food market's value.

Canned vegetables sales generate a further 26.7% of the global market's revenues. [See annexure 3]

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1.5 Market Segmentation II

Europe was the most lucrative regional market, accounting for 47.7% of the global canned food market's value.

The Americas generate a further 38% of the global market's revenues. [See annexure 4]

1.6 Market Share

DelMonte Foods holds a 6.7% share of the global canned food market's value. ConAgra Foods generates 4.4%

of the global canned food market's revenues. [See annexure 5]

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2

COMPETITIVE LANDSCAPE

2.1 Buyer/Supplier power

The canned food market is generally high volume-low margin. Fragmented food retailers are the main buyers.

Supplier power was weak, with canned food players able to source their commodity inputs from a large

number of suppliers. The canned food industry will be analyzed taking food processing and canning companies

as players and food retailers as the main buyers. Globally, food retail was fragmented, which means that

players can sell to a large number of relatively small buyers. However, in some important country markets,

mainly in Western Europe, retailer concentration was much higher. For example, in the UK, four supermarket

chains account for approximately 85% of food retail.

2.2 Economies of scale

Major players have strong brands and the scale economies associated with high-volume production facilities;

these mean that there was no more than a moderate threat of new entrants.

2.3 Brand loyalty

Retailers are unlikely to be swayed themselves by brand loyalty, and price sensitivity will be high. However,

these drivers of buyer power will be mitigated where consumers are loyal to particular brands: retailers will

need to stock these products in order to meet their own customers' demand. Food processors rarely integrate

forwards into retail, and vice-versa. Canned food was generally a significant part of a food retailer's business.

2.4 Access to Raw materials

Key inputs for canned food producers are raw materials such as grains, fruit and vegetables, and meat and fish.

There are two main ways for players to obtain these inputs. They may purchase them on the open market, in

which case they have little control over prices, and often use techniques such as hedging to mitigate the

impact of price fluctuations. Alternatively, they may negotiate supply contracts with growers and farmers -

fixed-term contracts with periodically negotiated prices are common. Where growers operate in a fragmented

upstream landscape, large food processing firms may have a strong negotiating position, but supplier power

was boosted by the switching costs to food processors of terminating a fixed-term agreement early. For

example, major US player DelMonte sources much of its vegetable supply from around 700 growers, with one-

year contracts and annually negotiated prices the norm; the company sources fruit from a similar number of

suppliers, with one- to ten year contracts. DelMonte also buys inputs, including flour and sugar, on the open

market.

Leading players must maintain product quality if they are to maintain their brand equity in the long term; their

need to source raw materials of appropriate quality tend to strengthen somewhat the suppliers that can offer

these. Metal cans are also important inputs in this market and, again, some market players enter into long-

term contracts with their supplier, which strengthens supplier power.

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2.5 Availability of substitutes

Substitutes are available for any one raw material in the sense that, if the price of one kind of vegetable rises, a

manufacturer could buy less of it and more of a cheaper one - provided, of course, its contracts with suppliers

are due for renewal. Overall, supplier power was weak.

From the point of view of consumers, the main substitutes for canned foods are frozen and dried products as

these offer similar benefits of convenience and extended storage lifetimes. Retailers, aiming to meet consumer

demand, will tend to stock both kinds of substitute. Dried products are less of a threat, as fewer foods can be

successfully dried than canned; frozen foods have the disadvantage (from a retailer's perspective) of requiring

more costly storage in freezers. However, few consumers will want to rely completely on canned products for

their non-perishable food needs and the threat of substitutes was assessed as strong.

2.6 Entry criteria

Some food product markets can be successfully entered on a small scale. For example, it is possible to enter

the bakery business as an independent, with artisanal production and a single integrated retail outlet, perhaps

appealing to customers by emphasizing the freshness and quality of bread baked on the premises. However,

the canned food business was difficult to enter in such a low-key manner. The majority of canned foods are

mass-market items, appealing to consumers mainly on the grounds of convenience and low price. Especially

where retailers are strong buyers, the per-can margins for manufacturers are not likely to be all that high. Also,

canning is inherently an industrial process that is very difficult to perform as a craft process.

2.7 Capital expenditure

These factors point to the need for considerable initial capital expenditure, in order to establish canning plants

offering scale economies that will offset the low margins expected. This raises the barriers to entry to the

global market.

Incumbents have strong brands. This was always a barrier to new entrants in markets where consumers

ultimately drive demand. It was particularly important in the canned food market because there was no way

for a consumer to assess the quality of a canned product from an unknown manufacturer before purchase

(other kinds of food can be checked visually, or perhaps even by smell and touch). Access to distribution

channels may be difficult.

Shelf space was a vital but finite resource and retailers will need to be persuaded to allocate it to a new

player's canned food, especially in highly competitive food retail markets. In some regions, access to suppliers

may also be non-trivial. Even where there was no shortage of small-scale growers, for example, it may be

difficult to set up reliable supply chains, especially for perishable raw materials in countries with poor

transport infrastructure. Furthermore, global market revenues have grown rather unexcitingly in recent years

making it less attractive to new players. Overall, there was a moderate likelihood of new entrants.

The global market was fragmented despite the presence of multinationals like Heinz and DelMonte. This

boosts rivalry. Retailers can switch between different manufacturers products quite easily, although the brand

loyalty of consumers exerts a pull-through on retailers and makes it difficult for them to abandon completely

the more expensive branded products for private-label alternatives. It was notable that the largest players in

this market own the majority of their factories (although they lease a few facilities): outsourcing was less

prominent in this business than in some other consumer markets.

2.8 Exit criteria

In consequence, exit barriers are high, since leaving the canned food market would require divestment of

substantial - and often quite specialized - assets. Fixed costs are also likely to be high and automated processes

mean that production can be ramped up when necessary. These factors tend to intensify rivalry. Some leading

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players have diversified into other food businesses, which reduces rivalry by making them less reliant on

canned food sales. However, market growth had been no more than modest in recent years, which boosts

rivalry, as players strive to retain their share of the revenues. Overall, there was a strong degree of rivalry in

this market.

High exit costs and a relatively large number of competitors are just two factors driving the strong rivalry that

characterizes this market.

2.9 Distribution

Supermarkets and hypermarkets form the leading distribution channel, with 69% of the global market by

value. Independent retailers account for a further 15.9% of the market's value. [See annexure 6]

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3

LEADING COMPANIES

3.1 Del Monte Foods Company

Del Monte was a branded food producer. The company presently has nearly 26 brands that provide a range of

food products, including: canned fruits and vegetables, sauces, soup, packaged tuna, baby foods, and pet

foods and snacks. The company had two main operations; consumer products, and pet products. In 2006, Del

Monte operated 15 production facilities and 11 distribution centers in the United States, Additionally; Del

Monte had operating facilities and distribution centers in American Samoa, Ecuador and Venezuela. The

company sells products under the Del Monte, S&W, SunFresh, Fruit Naturals, Orchard Select, Contadina,

College Inn and Nature's Goodness brand names, as well as private label products, in the consumer products

segment. This segment includes products such as: packaged spinach, carrots and potatoes; packaged fruits,

including peaches, pears, fruit cocktail/mixed fruits and apricots; packaged tomato products, including stewed,

crushed, diced, chunky tomatoes; broth products; and packaged infant feeding products.

The company uses a direct sales force as well as independent food brokers to sell its products to its customers

in different channels. It presently owns 22 US patents covering food production and preservation methods,

methods for manufacturing cans and ends, methods for sealing cans, animal foods and food processing

equipment.

3.2 ConAgra Foods, Inc.

ConAgra Foods (ConAgra) is a packaged foods company serving grocery retailers, restaurants and other

foodservice establishments, as well as food processors. The company was highly focused on the sale of

branded and value-added consumer products. The company owns consumer brands such as Healthy Choice

and Chef Boyardee.

The company operates four primary business divisions: consumer foods, food and ingredients, trading and

merchandising, and international foods. The consumer foods division offers branded, private label and

customized food products to various retail and foodservice channels. Its products include a variety of

categories (meals, entrees, condiments, sides, snacks and desserts) across frozen, refrigerated and shelf-stable

temperature classes.

This division had 44 manufacturing facilities in Arkansas, California, Georgia, Illinois, Indiana, Iowa,

Massachusetts, Michigan, Minnesota, Missouri, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas,

and Wisconsin; and one manufacturing facility in Arroyo Dulce, Argentina. Its key brands include Chef

Boyardee, Marie Callender's, Healthy Choice, Orville Redenbacher, Slim Jim, Hebrew National and Kid Cuisine

among others.

The food and ingredients division includes commercially branded foods and ingredients, which are sold

principally to foodservice, food manufacturing and industrial customers. This division's primary products

include specialty potato products, milled grain ingredients, dehydrated vegetables and seasonings, blends and

flavors, which are sold under brand names such as ConAgra Mills, Lamb Weston, Gilroy Foods, and Spicetec to

food processors.

This division operates 51 domestic production facilities (including two 50% owned facilities) in Alabama,

California, Colorado, Florida, Georgia, Idaho, Illinois, Iowa, Minnesota, Nebraska, New Jersey, New Mexico,

Nevada, North Carolina, Ohio, Oregon, Pennsylvania, Texas, Utah, Washington, and Wisconsin; one

international production facility in Puerto Rico; one manufacturing facilities in Canada (three of which 50%

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owned); one manufacturing facilities in the UK (five of which 50% owned) and three manufacturing facilities in

the Netherlands (50% owned).

The trading and merchandising division operates under the company's subsidiary ConAgra Trade Group. It

includes sourcing, merchandising, trading, marketing and distribution of agricultural and energy commodities.

It had 73 domestic production facilities (including two 45% owned facilities) in Colorado, Delaware, Idaho,

Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Montana, Nebraska, New Mexico, North

Dakota, Ohio, Oklahoma, Texas, Washington, and Wisconsin. The company's international foods division

includes branded food products, which are sold principally through retail channels in North America, Europe

and Asia. The division's products include a range of categories (meals, entrees, condiments, sides, snacks and

desserts) across frozen, refrigerated and shelf stable temperature classes. Its key brands include Orville

Redenbacher's, Act II, Snack Pack, Chef Boyardee, Hunt's, and Pam. It operates four manufacturing facilities in

Canada, Mexico and the UK.

3.3 Hormel Foods

Hormel Foods (Hormel) is a manufacturer, processor and marketer of meat and food products in the US and in

other countries through its subsidiaries. Products manufactured by the company include hams, bacon,

sausages, franks, canned luncheon meats, stews, chilies, hash, meat spreads, shelf-stable microwaveable

entrees, salsas and frozen processed foods. These products are sold to retail, foodservice and wholesale

customers under the company's patents and trademarks.

Hormel Foods sells products in all 50 states of the US, in addition to serving Australia, China, Spain, Canada,

Japan, Korea, Mexico, the Philippines and Vietnam. The company's manufacturing facilities are located in

Austin, Minnesota; Algona, Knoxville, and Osceola, Iowa; Atlanta, Georgia; Aurora and Rochelle, Illinois; Beloit,

Wisconsin; Fremont, Nebraska; Stockton, California; and Wichita, Kansas.

The Fremont plant also had a pork slaughtering operation that provides the company with additional raw

material through its pork slaughtering operation. Jennie-O Turkey Store, a wholly owned subsidiary based in

Willmar, Minnesota, was the nation's number one producer of whole and processed turkey products sold to

retail and foodservice outlets.

The company markets its products internationally through a wholly owned subsidiary Hormel Food

International Corporation (HFIC).

Products manufactured by the corporation include hams, bacon, sausages, franks, canned luncheon meats,

stews, chilies, hash, meat spreads, shelf-stable microwaveable entrees, salsas and frozen processed foods.

These selections are sold to retail, foodservice and wholesale operations under many well-established

trademarks that include Always Tender, Black Label, Carapelli, Cure81, Curemaster, Di Lusso, Dinty Moore,

Dubuque, Fast n Easy, Herdez, Homeland, Hormel, House of Tsang, Jennie-o Turkey Store, Kids's Kitchen,

Layout, Light & Llean, Little Sizzlers, Mary Kitchen, Old Smokehouse, Patak's, Peloponnese, Range brand, Rosa

Grande, Sandwich Maker, Spam and Wranglers.

The company reports its business in five segments: grocery products, refrigerated foods, Jennie-O Turkey

Store, specialty foods and others. The grocery products segment consists primarily of the processing,

marketing, and sale of shelf stable food products sold predominantly in the retail market. This segment also

includes the operations of Arriba Foods. Arriba Foods manufactures and distributes Mexican flour tortillas,

corn tortillas, salsas, seasonings, and tortilla chips for retail markets and the food service industry. These

products are marketed under the Manny's, Gringo Pete's, and Mexican Accent brands.

The refrigerated foods segment includes the meat products and foodservice business units. This segment

consists primarily of the processing, marketing, and sale of branded and unbranded pork products for the

retail, food service, and fresh customer markets. This segment also includes the Precept Foods operation, a

51% owned joint venture with Cargill Meat Solutions Corporation, which offers fresh, case ready, branded pork

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and beef products. Clougherty Packing (Farmer John), a pork processor, was included as an operating segment

within Refrigerated Foods. The meat products business unit includes the operations for Lloyd's Barbecue.

The specialty foods segment includes the Diamond Crystal brands, Century Foods International, and Hormel

Specialty products operating units. This segment consists of the packaging and sale of various sugar and sugar

substitute products, salt and pepper products, dessert mixes, gelatin products, and private label canned meats

to retail and foodservice customers. This segment also includes the processing, marketing, and sale of

nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional

products. Diamond Crystal Brands includes the results of operations for Hormel Health Labs and Mark-Lynn

Foods. Hormel Health Labs offers a full line of specialized food products for the healthcare industry and Mark-

Lynn manufactures and distributes food products including salt and pepper packets, ketchup, mustard, sauces

and salad dressings, creamers, sugar packets, jellies, desserts, and drink mixes.

Others include the Dan's Prize and Hormel Foods International operating units. These businesses produce,

market, and sell beef products and manufacture, market, and sell company products internationally. This

segment also includes various miscellaneous corporate sales.

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4

STRUCTURE ANALYSIS

Based on the above data, we can analyze the industry as follows:

1. Entry Barriers

Attractiveness Parameter

1 2 3 4 5 Remarks

Economies of

Scale √

Established canning plants required as high volumes, low

margin industry

Market Share:

Del Monte 6.7%

Con Agra 4.4%

Homel Foods 2.3%

Product

Differentiation √ Brand loyalty high, consumers unsure of quality

Brand Identity √

For consumers quality of new manufacture was

unknown and there was the need to smell and touch.

Hence retailers are brand conscious

Switching Costs √ As brand loyalty of end consumers high

Access to

Distribution

Channels

√ Retailers are not swayed by brand loyalty

Capital

Requirements √ Since the industry is vertically integrated

Access to

Technology √

Skills-based, which is an intangible asset not easily

available

Access to Raw

Materials √ Can purchase directly from open market even farmers

Average 3 Moderately Attractive

2. Exit Barriers

Attractiveness Parameters

1 2 3 4 5 Remarks

Asset

Specialization √ Non-fungible assets

Cost of Exit √ High exit costs

Average 2 Not attractive

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3. Rivalry among Competitors

Attractiveness Parameter

1 2 3 4 5 Remarks

No. of

Competitors √

Del Monte, ConAgra, Hormel are the three major players

in the market

Industry Growth √ CAGR 2.2 % from 2002 to 2006

Fixed Costs √ Asset Specialization

Differentiation √ Brand loyalty high, consumers unsure of quality

Switching Costs √ As brand loyalty of end consumers high

Strategic Stakes √ Leading players are diversified

Average 3 Not Attractive

4. Bargaining Power of Buyers

Attractiveness Parameter

1 2 3 4 5 Remarks

No. of Buyers √ Large number of fragmented retailers

Substitutes √ Substitutes not easily accepted due to brand loyalty

Switching Costs √ As brand loyalty of end consumers high

Buyers’ threat of

Backward

Integration

√ Capital requirement was too high for retailers

Supplier’s threat

of Forward

Integration

√ As industry is vertically integrated

Average 4 Moderately Attractive

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5. Bargaining Power of Suppliers

Attractiveness Parameter

1 2 3 4 5 Remarks

No. of Suppliers √ Large number of suppliers

Substitutes √ Substitutes for raw material easily available

Switching Costs √ Substitutes for raw material easily available

Buyers’ threat of

Backward

Integration

√ Less probability as primarily agro-products require a

completely different skill-set

Supplier’s threat

of Forward

Integration

√ Farmers cannot setup manufacturing firms

Industry’s

importance to

Supplier

√ Suppliers supply to many different customers

Average 3.5 Fairly attractive

6. Threat of Substitutes

Attractiveness Parameter

1 2 3 4 5 Remarks

Availability of

close substitutes √ Substitutes are available ( fresh raw mat., meat etc)

Switching Costs √ Can switch to fresh food

Substitute’s

price/value √ Substitute value for money was high

Average 2 Not Attractive

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Summary Table

Parameter Attractiveness

Entry Barriers 3 Moderately attractive

Exit Barriers 2 Not attractive

Rivalry Among Competitors 3 Moderately attractive

Bargaining power of Buyers 4 Very attractive

Bargaining Power of Suppliers 3.5 Attractive

Threat of Substitutes 2 Not attractive

Average 3 Moderately Attractive

Conclusion

The canned food market is generally high volume-low margin. Food retailers are the main buyers and generally

wield strong buyer power, especially if they are large chains. Supplier power was weak, with canned food

players able to source their commodity inputs from a large number of suppliers. Major players have strong

brands and the scale economies associated with high-volume production facilities; these mean that there was

no more than a moderate threat of new entrants. High exit costs and a relatively large number of competitors

are just two factors driving the strong rivalry that characterizes this market.

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ANNEXURES

Annexure 1

Market Value: $ billion, 2002-2006

Global Canned Food Market Value: $ billion, 2002-2006

(Source : Datamonitor)

Annexure 2

Global Canned Food Market Volume: Kg billion, 2002-2006

(Source : Datamonitor)

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Annexure 3

Global Canned Food Market Segmentation I: % Share, by value, 2006

(Source : Datamonitor)

Annexure 4

Global Canned Food Market Segmentation II: %Share, by value, 2006

(Source : Datamonitor)

16

Annexure 5

Global Canned Food Market Share: %Share, by value, 2006

(Source : Datamonitor)

Annexure 6

Global Canned Food Distribution: %Share, by value, 2006

(Source: Datamonitor)

17

Annexure 7

Global Canned Food Market Value Forecast: $ billion, 2006-2011

(Source : Datamonitor)

Annexure 8

Global Canned Food Market Volume Forecast: Kg billion, 2006 - 2011

(Source : Datamonitor)

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